Exchange rate pass-through and product heterogeneity: Does quality matter on the import side?

Michele Bernini and Chiara Tomasi ()

European Economic Review, 2015, vol. 77, issue C, 117-138

Abstract: This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to the quality of imported inputs and exported output. We develop a model where the production of high-quality products requires high-quality inputs sold in monopolistically competitive foreign markets. The model predicts that exporters using imported inputs have low exchange rate pass-through, but this effect is weaker for firms shipping high-quality goods. This is due to the heterogeneous price adjustments of foreign suppliers selling inputs of different quality. We test the predictions of the model using Italian firm-level trade data for the period 2000–2006. The empirical analysis shows that the imports of intermediates have a significantly weaker effect in reducing the exchange rate pass-through into the export price of high-quality varieties. By showing that the import price of high-quality inputs is less sensitive to exchange rate variations, we provide evidence supporting the theoretical hypothesis that the pricing power of input suppliers weakens the import channel.

Keywords: Importers; Exporters; Quality and exchange rate disconnect (search for similar items in EconPapers)
JEL-codes: F12 F14 F31 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Working Paper: Exchange rate pass-through and product heterogeneity: does quality matter on the import side? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:77:y:2015:i:c:p:117-138

DOI: 10.1016/j.euroecorev.2015.04.005

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